Passing the stress test

New federal mortgage rules require all borrowers to be tested

There’s a lot of excitement that comes with buying your first home.
There can also be a lot of stress, most of which stems from dealing with banks or other lenders as your try to nail down a mortgage.
As of Jan. 1, that process just became a little more challenging for first time home-buyers as the federal government’s Office of the Superintendent of Financial Institutions (OSFI) instituted new rules around mortgages.
If that’s news to you, you’re not alone. A poll conducted by RE/MAX last year found that 37 per cent of Canadians had no idea the new rules were on the way.
The precursor to this latest rule change was introduced last year when it was mandated that high-ratio insured mortgage borrowers – those with a downpayment of less than 20 per cent and mortgage insurance – would be required to undergo a stress test to determine their ability to keep up with payments in the event that interest rates climb.
Now, anyone applying for a mortgage, regardless of down payment size and mortgage insurance status, must qualify at a new minimum rate that is the greater between the Bank of Canada’s five-year benchmark – increased to 5.14 per cent last Wednesday – or the offered mortgage contract twice plus two percentage points.
More often than not it’ll be the latter as most lending institutions are offering five-year fixed rates between 3.5 to 3.7 per cent.
“With the introduction of a stress test, mathematically everybody is potentially going to be able to borrow less,” explains Paul Taylor, president and Mortgage Specialists Canada, the national mortgage industry association representing 11,500 individuals and 1,000 companies, including brokerages, lenders, insurers and industry service providers.
The aim of the new rules is to protect homebuyers by keeping them from biting off more than they can chew and feeling undue financial stress when the rates climb.
But for first-time home buyers, the new rules may force them to scale down their expectations, Taylor says, by as much as 20 per cent.
“If you have a first-time buyer out in the market today looking for a $250,000 home, for example, that's what would they could qualify for before Jan. 1. Now they're probably going to be looking at something around $200,000.”
The Bank of Canada has even gone so far as to suggest that the changes could disqualify as much as 10 per cent of home potential newcomers to the housing market.
Once disqualified from the mortgage market that’s federally regulated, borrowers can look to provincial regulated lenders like credit unions, which aren’t subject to the same stress testing. For now, at least.
Taylor cautions that those options tend to come with even higher interest rates.
“Mortgage brokers generally have all sorts of options available, but you might find that the interest rates with expected increases if you are being issued a loan and not being subject to that stress test, which is ultimately going to be more expensive to carry long term.”
But the effects of the new rules aren’t just hitting prospective new entrants to the housing market. Anyone looking to renew their mortgage with another bank will also be subject to a stress test, likewise for a homeowner who wants to refinance their property.
“Anybody looking to refinance their home is also going to find themselves, potentially, able to withdraw less of the equity that they've previously been able to,” says Taylor.
Whether you’re a first-time buyer or an existing home owner interested in taking out a second mortgage or exploring options with other lenders, Taylor’s best advice is to examine your debt and the distribution of it before making any changes.
“Focus on reducing the debt they've currently got on any line of credit or credit card, they'll be much better prepared for any sort of mortgage negotiation or home purchase in the future.”
For first timers in particular, he suggests meeting with a broker or lender to get a clearer picture of what you can afford to borrow before looking for a property.

Kenn Oliver is a columnist and business writer for The Telegram and Saltwire Network.